Eleven non-OPEC countries, including Russia, also agreed to cut output by 558,000 b/d in the first half of 2017.

Some doubt about whether or not OPEC would actually adhere to the agreement has surfaced, but the January report shows most countries are taking the cuts very seriously. Saudi Arabia, Kuwait and Angola made larger cuts than they were required, which helped to make up for some of the other countries who did not quite meet their production goals.

Saudi Arabia’s energy minister, Khalid al-Falih, said that Saudi Arabia would “strictly adhere” to their commitment, while Kuwaiti oil minister Essam al-Marzouq said Kuwait would “lead by example.” Marzouq is a member of the committee that will monitor and enforce the production agreement along with a representative from both Algeria and Venezuela and non-OPEC countries Russia and Oman.

What about U.S. shale production?

Iraq, Algeria and Venezuela did not meat their production goals, with Iraqi output at 4.48 million b/d, despite a quota of 4.35 million b/d, said Platts. This is where the controversy kicks in. Some still speculate that some OPEC countries, like Iraq, do not intend to cut production as much as promised, since the elevated oil price has sparked more production from U.S. shale producers. Iran, whose sanctions were lifted (and now may be reinstated after its recent missile test) was not required to cut production at all.

Improved technology and efficiency have made breakeven prices for drilling in the North American shale plays much more competitive, which means that there is renewed interest in shale production. In the Bakken, for example, the average breakeven cost per barrel was $59.03 in 2014, which fell to $29.44 in 2016, said the Hellenic Shipping News quoting Rystad Energy. The Hellenic Shipping News stated:

The new administration of President Donald Trump is bent on increasing output of petroleum with his ‘America First Energy Plan.’ This may again trigger another round of animosities reminiscent of the last six years price war between OPEC led by Saudi Arabia and the United States.

Increased U.S. shale production was met by huge increases in Saudi production, and so on and so forth until the oil glut caused the price to tank. If the U.S. continues to ramp up shale production amidst cuts elsewhere by OPEC and other non-OPEC countries, will there be retaliation?

Don’t forget here that the global price of a fungible commodity like oil is set by whatever the marginal producer is willing to sell for. OPEC can try to keep prices up all it wants but if there’s new supply then prices will be determined by that new supply.

Worstall also mentions, however, the completely different structure shale production, in which fracked wells only produce at peak numbers for about a year, and producers must always be in search of new wells.

If you don’t keep developing new wells then your production quickly declines and thus you gain nothing at all from those higher prices from the lower production. The economic incentives are entirely and completely different… Thus the fracking producers simply cannot be brought under the control of such a production limiting cartel. And if there’s substantial extra potential production out there then the cartel won’t stand over time. Especially since lot of American shale production is profitable at prices well below current market prices.

Currently, American producers plan to spend far more this year, an average increase of 60 percent, according to the Wall Street Journal. The U.S. rig count is significantly higher as well, another indicator that shale producers have no intention of slowing down. Just the opposite, in fact. So despite the fact that OPEC producers seem to have stuck to commitments for now, other factors could still get in the way of the effect the cuts were supposed to achieve.

Demand and the China Question

Despite OPEC production cuts, John Kilduff from Again Capital told CNBC said that China’s weakening energy demand could be a big problem that makes production cuts less effective in keeping the price of oil high. CNBC says that Kilduff, a longtime skeptic of OPEC’s ability to deliver output cuts, has warned throughout the year that slowing economic growth in China and elsewhere in Asia is the oil market’s Achilles’ heel. Kilduff, like Worstall, sees increased U.S. production driving down the price of oil. That, in conjunction with China’s weakening economy, could spell disaster for the global oil industry.

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